September 22, 1999

Big Blue Casts Itself as Big Brother to Business on the Web

By STEVE LOHR

fter years of working as a marketing
executive for champagne houses like
Taittinger and Veuve Clicquot, Rosemary Zraly decided it was time to branch
out on her own. Like so many entrepreneurs
in the 1990's, Ms. Zraly -- a consultant,
lecturer and author -- headed for the World
Wide Web.

Ruby Washington/The New York Times

She Knows Her Bubbly, but Nothing About Bytes

Rosemary Zraly has a recommendation for personal computer makers. "They should
give out Valium with the PC when you buy one," she said. "It's painful learning how to
really use one."

Ms. Zraly wanted to avoid having to master Web technology to get her online business,
Champagnelady.com, up and running. That was why I.B.M.'s Home Page Creator service
for small businesses appealed to her: it seemed to be a practically pain free way to start an
Internet venture.

I.B.M. helped her set up a Web site, which is run at I.B.M.'s data center in Schaumburg,
Ill., outside Chicago.

Ms. Zraly does not baby-sit for computer hardware or fret about software bugs or crashes.
I.B.M. also handles most of the back-office plumbing of Internet business, processing the
online transactions and credit-card verification.

"All I have to do is ship the goods when I receive an order," Ms. Zraly said.

The monthly fees for the I.B.M. small-business service range from $30 to $200, depending
on the Web site's size. Ms. Zraly pays I.B.M. $60 a month.

She can check the traffic on her site, update it or edit it from her home office in New York.
And Ms. Zraly has adapted to the Web's always-on pace.

"My Web site is the first thing I check every morning and the last thing I see at night," she
said."It's like living with another person, totally part of my life."

Her Web site, Champagnelady.com, is a
decidedly modest foray into Internet commerce. It amounts to an advertisement for
herself and an online shop for merchandise,
including a book she has written and all
manner of champagne paraphernalia,
glasses, ice buckets, even earrings. No corporate powerhouses quake at the mention of
her Web site. No Wall Street bankers are
wooing Champagnelady.com, eager to sell
its shares in a public stock offering.

Yet Ms. Zraly's venture shows one side of
the new economics of the Internet. "Anybody can afford to get into business this
way," she said. "It's cheaper than my cable
TV bill."

Behind Ms. Zraly, pocketing a $60 monthly fee for running her Web site, is an unlikely
partner -- the International Business Machines Corporation, the world's largest computer company. Its customers have long
been its corporate peers on the Fortune 500,
not tiny upstarts. Until a few years ago, that
is, when the Internet took off and IBM
went with it in new and innovative directions.

IBM itself shows another side of the new
economics of the Internet -- how a big, old-line company can turn the challenge of
technological upheaval into a rejuvenating
opportunity. IBM has embraced the Internet in its products, practices and marketing
-- from overhauling its mainframes into
Internet computers to refashioning itself as
an Internet leader with its giant "e-business" advertising campaign.

The result has been a startling revival in
IBM's prospects and image. A few years
ago, IBM was stumbling as the mantle of
leadership in computing seemed to have
passed to the Microsoft Corporation and the
Intel Corporation, the technology standard-setters of the personal computer era. But
the Internet changed the landscape again.

The rise of the Internet -- a vast global
network -- played to IBM's traditional
strengths. It required powerful centralized
computers to serve up data to millions of
viewers. And IBM adapted its big-iron
computers to Internet protocols, recasting
them as giant Web servers and the transaction-processing workhorses of electronic
commerce.

As the Internet moves beyond the experimental stage, as more and more companies
actually run their businesses on the Internet, those systems must be robust, secure
and up and running 24 hours a day, seven
days a week. That level of reliability is
second nature to IBM, and it is why airline
reservations systems, national defense systems and the like depend on IBM

"We were moving in the right direction
and, frankly, we were lucky as well," said
Nicholas Donofrio, the senior vice president
for technology at IBM "The industry
moved our way."

Today, IBM is a leading supplier of
technology and know-how in the Internet
era. The well-known names of this new
world may be America Online, Amazon.com
and Yahoo, but IBM has emerged as the
quiet giant of the Internet by serving as a
kind of arms supplier for this new economy
to companies of all sizes. In that role, it has
plenty of competition from a wide range of
companies, including Sun Microsystems,
Hewlett-Packard, Microsoft and others. But
none has risen as fast from what seemed to
be so far behind not long ago.

"IBM is getting a real bounce from the
Internet," said Stan Dolberg, a senior analyst at Forrester Research Inc., a consulting
firm. "It seemed a moribund company
three or four years ago. But IBM jumped
on the Internet instantly, and it's been an
innovator. It has surprised a lot of people."

The company estimates that roughly
one-quarter of its revenue -- or $20
billion -- is driven all or in part by E-business demand. It defines E-business as
companies grappling with Internet-related
projects, from setting up a Web site to reach
customers to handling most of its procurement over the Internet.

IBM has helped thousands of small companies get on the Web, and it runs their sites
for fees that range up to $200 a month. By
2001, it hopes to have two million small-business customers.

Yet it is the larger companies that remain
IBM's bread-and-butter business. They
often hire IBM to help them use the power
of Internet technology to revamp the way
they deal with suppliers, customers and
employees in an effort to lower their costs,
focus their marketing and eliminate mountains of paperwork. These can be multimillion-dollar projects.

Most of this work involves the economic
infrastructure of companies dealing with
one another -- known as business-to-business commerce. It is the business-to-consumer commerce of Amazon.com, Ebay
and others that understandably gets the
most attention. But streamlining business-to-business transactions will ultimately
have the greatest effect on consumers in
terms of prices and quality of service.

Business-to-business dealings, analysts
say, represent the biggest opportunity for
Internet commerce over the next several
years. Forrester Research estimates that
consumer sales over the Internet will jump
to $108 billion by 2003 from $3.9 billion last
year. But that impressive increase is
dwarfed by Forrester's projection for business-to-business commerce on the Internet,
rising to $1.5 trillion by 2003 from $45 billion
last year.

And it is industry's "back office" -- procurement, accounting, order-processing and
the like -- that economists are watching
most closely for evidence that the spread of
the Internet is leading a technology-based
productivity payoff in the nation's economy.
The evidence on that front is still inconclusive, but that could be because the use of
powerful computing and Internet technology has not gone very far yet.

Louis V. Gerstner Jr., the chairman of
IBM, made that very point in a speech
before industry analysts and professional
investors in May. He bemusedly observed
all the attention lavished on "these new dot-com Internet companies" by the media and
Wall Street, before proceeding to his theme.

"But I think of them as fireflies before the
storm: all stirred up, throwing off sparks,"
Gerstner said. "But the storm that's
arriving -- the real disturbance in the Force
-- is when the thousands of institutions that
exist today seize the power of this global
computing and communications infrastructure and use it to transform themselves.
That's the real revolution."

Under Gerstner, IBM has undergone its own internal transformation. Much
of its sales, service, procurement and training are now handled on the Web.

IBM estimates that $3.3 billion of its
sales last year were over the Web, or roughly five times those of Amazon.com. This
year, IBM plans to have Web sales --
mainly to corporate customers -- of $10
billion to $15 billion. The company figures it
will save $600 million this year by letting
customers find answers to straightforward
service and technical support questions on
specialized IBM Web pages, thus freeing
the time of its human support staff for more
complex problems. By handling a portion of
its internal training over the Internet instead of in classrooms, IBM estimates it
will save $100 million. And by procuring $12
billion worth of goods over the Web this
year, IBM says it will do away with about 5
million pages of paper forms.

To position itself as a company on the
cutting edge of electronic commerce,
IBM began a major advertising
campaign in the fall of 1997, promoting the
notion of "e-business." The term was new
then but has since become routinely used in
newspaper and magazine stories and in the
marketing campaigns of other companies.
The IBM ad campaign -- budgeted at $550
million worldwide this year -- has featured
customers of all kinds, from body-pierced
Web designers to Ms. Zraly to corporate
titans. Its implicit message is that the Internet is not about just putting up a Web site, it
is the technological starting point for a
complex rethinking of how business is done.
Trust us, we're IBM, we know more about
business and complex technology than anyone else.

Big companies like Ford, United Parcel
Service, Charles Schwab and Bank One
have chosen IBM as their technology partner as they try to exploit the Internet to
transform their businesses. Yet so have
ambitious start-ups that are trying to
change the economics of an industry, like E-Chemicals Inc.

E-Chemicals, based in Ann Arbor, Mich.,
is an online marketplace for chemicals,
founded by a group of former Dow Chemical
employees and distribution experts. Its
chairman is Yossi Sheffi, the director of the
Center for Transportation Studies at the
Massachusetts Institute of Technology, and
its president and chief executive is Jim
Alampi, the former head of one of the nation's largest chemical distributors.

The chemical business is a $250-billion-a-year industry in the United States. E-Chemicals is betting it can make its fortune by
streamlining the industry's fragmented distribution system, a jury-built setup based on
industry directories, phone calls, faxes and
relationships with distributors.

Its online chemical marketplace lists 20
suppliers, including DuPont, more than 1,000 products and 600
registered customers. For suppliers, E-Chemicals offers a low-cost way to sell to
small customers, right down to sales of a
couple of 55-gallon drums. For smaller buyers, E-Chemicals promises to substantially
level the playing field by offering the kind of
lower prices usually available only to distributors' big customers.

E-Chemicals can do that because of its
lower expenses, operating as a kind of "virtual corporation" that uses subcontractors
for much of its basic work. It has just 20
employees. Sun Trust Banks acts as its
credit and collections department, and Yellow Freight serves as its logistics department. IBM helped build its large Web site
at www.e-chemicals.com and supplies much
of its critical software. The site is hosted at
a huge IBM data center in Schaumburg,
Ill.

E-Chemicals says it chose IBM because
of its history of serving chemical-industry
customers and its tradition of building and
running computing systems that handle
complex industrial transactions.

"For what we are doing, we're not talking
about some online billboard where how it
looks and the user interface are all that
matter," Alampi said. "We're doing
real commerce on this Web site. It has to be
secure, and it has to be able to scale up
quickly. IBM can do that. And we don't
want to have to buy computer hardware
ourselves, so we let them handle all that by
hosting the site. At E-Chemicals, our expertise is in the chemical business and distribution, and we want to stay focused on that."

Jim West/Impact Visuals for The New York Times

Jim Alampi, the chief
executive of E-Chemicals. IBM helped build the company's Web site,
which is run from an IBM center.

Saab Cars U.S.A., the American distribution arm of the Swedish auto maker, is
putting in place a Web-based system that is
a typical example of how existing companies are trying to use Internet technology to
improve customer service. Most of its 210
dealers now have a new system, using mostly IBM computers and software, for ordering parts and providing customer service
and training. The dealers tap in from personal computers to Saab's database, and the
early goal is to make dealer service more
timely and efficient.

Yet the company is also working on
creating more detailed, car-by-car
data profiles that customers can use.
With help from IBM, the company is building a vast "customer vehicle database" that
will, for example, allow the owner of a used
Saab to look up the repair history of that
car. A person interested in buying a new
Saab will be able to go to the company's Web
site, look at the available models and arrange online for the local dealer to deliver
one for a test drive.

"The goal is to serve customers better
and ultimately sell more cars," explained
Jerry Rode, the director of information
technology for Saab.

The Bank One Corporation, the nation's
fifth-largest banking company, faces the
classic Internet challenge of an enterprise
with a vast bricks-and-mortar network. It
has more than 1,900 offices nationwide,
serving more than 9 million retail customers.

Bank One is making a big Internet push,
both with its own Web site and by opening a
virtual bank last June, called Wingspan.com. John B. McCoy, the president of Bank
One, succinctly summed up the thinking
behind these moves: "I am not about to sit
here and let someone take my business."

IBM is helping Bank One with its Internet strategy for gathering more customers.
Wingspan.com is hosted at IBM's Schaumburg data center, selected for its reliability
and knowledge of networks.

But Bill Wallace, the top technology executive for Wingspan.com, also mentions one
attribute that is surprising for a company
once viewed as a dinosaur. "The Web is
about speed," he explained, "and IBM can
move very quickly these days."

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